Software in the recession

Out on its own

Autonomy, Britain’s largest software firm, is prospering amid the gloom

LOSERS can sometimes land on their feet. After the internet bubble burst in 2000-01 Autonomy, a British software firm, had a dramatic fall from grace. Its share price dropped by more than 90%, as did the fortune of Michael Lynch, its founder, who had been hailed as Britain's answer to Bill Gates. “No one needs a billion pounds,” he said, putting a brave face on it. As the technology industry shrinks once again, however, Autonomy is one of the winners. Today it is Britain's biggest software company by market value, and there is no mistaking Mr Lynch's satisfaction as he reviews his firm's latest results. Revenues in the last three months of 2008, a disaster for most technology companies, were up 26% compared with the previous year, reaching $145m. Net profit more than doubled to $51m. What could explain this remarkable reversal of fortune?

For a start, the suffering of technology firms depends on how high up they are in the value chain. Chipmakers have been hardest hit so far, with some reporting revenues down a staggering 50%. Computer-makers are doing somewhat better, but deferring the purchase of new hardware is an easy way to cut costs. Many software firms, by contrast, have held up well—in particular, those that sell programs customers cannot do without, and that have stable revenue from licences and services.

Autonomy is a case in point. Many think of the firm, which Mr Lynch founded in 1996 with an impromptu loan from a drunken rock band manager in a London bar, as a kind of Google for corporate data. But its products do much more than just search for keywords in a company's files. Using complex algorithms, they are able to extract ideas from all kinds of data, be it text, audio or video—even if these ideas are expressed in different terms.

From its inception, the software has been popular with government agencies, particularly intelligence services. But today 80% of Autonomy's revenues come from companies. Demand here has been increasing rapidly, mainly because of growing regulatory burdens. In America, for instance, rules governing civil lawsuits now require firms to produce all relevant pieces of digital information in court. In the past, forking over the e-mail on a given topic was often enough.

In recent months, says Mr Lynch, big banks in particular have bulked up on Autonomy's software, to prepare for lawsuits in the wake of the financial meltdown. He is betting that litigation will be an even juicier market in future: in January Autonomy bought Interwoven, an American maker of software that helps big law firms keep track of their documents, for $775m.

Yet the most important reason for Autonomy's success is that it is riding a long-term trend in computing. Corporate computing was once all about “structured data” such as payroll records or sales figures. Now, however, computers are also able to crunch “unstructured” data, such as documents, e-mails and photographs. And the quantity of such data has exploded: more than 80% of a typical company's information is now unstructured, according to some estimates. Firms that can extract meaning from this digital pile will have a big advantage.

Mr Lynch, who developed Autonomy's technological underpinnings while writing a doctoral thesis at Cambridge University, wants his firm to become the “Oracle of unstructured data”, a reference to the database giant that is the world's second-largest software firm. Autonomy seems well on its way to achieving that ambitious goal. A serious rival has yet to emerge, and some 400 other software companies have licensed the firm's core technology, called IDOL, for their own products, so that it is fast becoming a de facto standard.

To be sure, Autonomy will have to compete against Microsoft, which has bought FAST, a Norwegian rival, says Madan Sheina of Ovum, a market-research firm. Autonomy could also end up being acquired, not least by Oracle, the industry's big consolidator, which would certainly like to dominate the field of unstructured data as well. But for the time being, Autonomy is a rare bright spot in an otherwise depressing high-tech landscape.